Here's why an inverted yield curve is bad news for America

Economists look at the US Treasury yield curve as an indication
of the health of the economy.

Treasury bonds are considered the safest non-cash asset investors
can invest their money in and so serve as the place
many economists and strategists look to get the broadest feel for
how much investors are demanding for taking risks.

And so to judge the overall health of the economy and the
confidence of investors, economists and strategists look at the
"slope" of the yield curve.

When the yield curve is steepening, or longer-term yields are
rising faster than near-term yields, it typically signals an
improving economy as investors believe they can earn better
risk-adjusted returns in assets other than Treasuries.

At the other end of the spectrum, a flattening yield curve occurs
when short-term rates are increasing faster than long-term rates,
suggesting a slowing economy while investors re-trench
and opt for the relative safety of longer-dated
Treasuries as riskier assets face potential losses.

And when enough buying happens on the long end of the yield curve
— or selling on the short end — the yield curve can invert,
meaning long-term rates fall below short-term rates.

This is often a sign that an economy is headed for a recession.

The previous five recessions were predicted by an inverted
yield curve, an currently, the 2-year/10-year spread — or
difference between the nominal yield on 2-year Treasuries and
10-year Treasuries — is down to 128 basis points, the tightest
its been in over six years.

Andy Kiersz/Business Insider

And with the Fed presumed to be ready to embark on a rate hiking
cycle, many economists believe the long end of the yield curve
will hold steady or drift lower while the front end rises.

This would produce further flattening of the yield curve and
potentially an inversion.

A basic use of technical analysis shows a double top has formed
over the past six years or so and suggests the yield curve could
flatten to -9 basis points.

And if history is any guide, this would seem to set up the
next recession.